Gold edged up on bargain hunting on Wednesday, but still hovered near its weakest in a month as talks between the White House and Congress to avoid year-end tax hikes and spending cuts showed little progress and kept most investors at bay.
The US economy could slip into recession if the two parties failed to reach a deal to avoid a year-end budget crisis. President Barack Obama dangled the possibility of lowering tax rates in 2013 with a broad U.S. tax code revamp, but stood firm on insisting rates for the wealthiest must rise as part of a budget deal with Congress.
Gold rose $3.47 an ounce to $1,700.21 by 0230 GMT after falling to $1,690.64 on Tuesday, its weakest since Nov. 6, on heavy fund liquidation and options-related selling.
"I think there are a few scenarios that we could look at. They may not come to a real, long-term deal. So we are expecting that there will be delays, which mean they will extend the deadline until they come to an agreement," said Lynette Tan,
senior investment analyst at Phillip Futures in Singapore.
"If this happens, gold will probably be pressured in the short term until the reality that delaying the solution will ultimately hurt the economy further."
U.S. gold futures for February added $6.10 an ounce to $1,701.90.
Worries over whether the United States could avert the so-called fiscal cliff, a series of automatic tax hikes and spending cuts worth $600 billion that will begin taking effect in January unless Congress acts, weighed on shares in Asia.
"If the U.S. really falls off the 'fiscal cliff', we are likely to see some buying of gold for store of value and also on the outlook that the U.S. dollar may depreciate further," said Tan at Phillip Futures.
"This is likely to give some support to gold."
News that South Korea's central bank had purchased 14 tonnes of gold in November using its foreign reserves in order to spread its portfolio risks was largely ignored."We continue to see a risk of further sharp moves in gold after the dead cat bounce yesterday," the ANZ said in a report.
"We are biased towards a near-term technical decline targeting $1,670 but remain constructive on medium term fundamentals."
The euro hovered at seven-week highs against the dollar on Wednesday, while oil was mostly steady. Concerns about the health of the U.S. economy kept investors on the edge.